The option of an orderly liquidation appears to be an oxymoron. That's because Lehman and other Wall Streeters participate in a $62 trillion Credit Default Swap (CDS) industry (it's over four times bigger than US Gross Domestic Product). When a CDS settles, due to the bankruptcy of bond issuers or another event of default, CDS buyers purchase the company's bonds, which they need to settle their CDS contracts.

According to FOXbusiness, an orderly liquidation of Lehman would require the rest of Wall Street to pick through Lehman's CDS portfolio and decide whether other firms could step in for Lehman in many of these deals. I have not seen any estimates regarding how much this would cost the other banks. But it seems to me that unless the documentation for all these CDSs is extremely clear and thorough, it could be quite a lengthy process to sort through the complexity. I doubt it can all be cleared up before Asian markets open on Sunday night New York time.

The $1.4 trillion worth of CDS contracts on Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) books are still being sorted out because last Sunday's government takeover triggered their unwinding. Adding the Lehman contracts to this unwinding process could stress out a CDS settlement system that has never been tested to this extent. "In a cash settlement, CDS sellers pay borrowers the difference between a defaulted bond's market value and par," writes FinancialWeek.

It reports that following their nationalization, the good news is that Fannie and Freddie bonds now trade near par so the settlement of those CDS contracts may not be catastrophic. But this may not be the case with Lehman and its CDS contracts. Moreover, ratings agencies are likely to downgrade the debt ratings of Lehman if its situation is not resolved soon. This would throw more gasoline onto the financial fire.

My prediction is that Lehman will file for bankruptcy later today since it appears to be the least bad of the available options. The others do not appear likely to come to fruition by tonight. It remains to be seen whether global markets will react calmly to this news or will meltdown as Paulson predicted they would have if he had not bailed out Bear Stearns, Fannie and Freddie.

If the government decides not to make a decision tonight, then the other options could remain in play. But that uncertainty might produce even more havoc.

Update1. Bloomberg News reports that the capital constrained UK bank, Barclays, may bid for Lehman. It also provides a useful estimate of how much more a buyer might need to write-down Lehman's "bad bank" assets -- $21 billion which it estimated by reducing Lehman's mortgage-related assets valuations "further to between 5 cents on the dollar for collateralized debt obligations and 35 cents for European mortgages," according to Bloomberg.

Update 2. Telegraph.co.uk reports that Barclays, which this morning appeared to be the best hope for a Lehman Brothers acquirer, has declined to bid. The reason? "the US government's unwillingness to guarantee Lehman's assets," according to Telegraph. This makes a bankruptcy filing more likely -- but it also puts pressure on the US to cave in to demands to backstop those dodgy Lehman assets to facilitate a deal.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.